Supply of electricity can entitle the landlord to deduct input VAT - BFH ruling XI R 8/21 of 17 July 2024

Facts of the case

The landlord let an apartment block and a semi-detached house VAT exempt for residential purposes. He had a photovoltaic system installed on both buildings, which generated the electricity for the residential units. Consumption was metered separately for each residential unit and billed to the tenants individually at a standard market price. The landlord fed surplus electricity into the public grid. If the electricity produced by the photovoltaic systems was not sufficient, the landlord purchased electricity and charged the tenants a surcharge.

The supply of electricity was regulated in supplementary agreements outside of the rental agreement and allowed the tenants to cancel the electricity supply from the landlord independently of the rental agreement and to purchase the electricity elsewhere. In this case, however, the tenants had to pay the costs of the conversion work on the meter system.

The landlord claimed input VAT deduction from the costs of the photovoltaic system. The tax office rejected this with the argument that the electricity supplies were dependent ancillary supplies to the VAT exempt letting. The tax court ruled in favour of the landlord at first instance, and the tax office appealed.

BFH ruling: right to input VAT deduction

After the Senate has defined the criteria of ancillary services or independent main services according to the established principles, it refers to the ECJ decision WAM and the demarcation criteria developed there: If the tenant can choose the suppliers and/or the terms of use, the supplies (here: the electricity supplies) can in principle be regarded as separate from the letting – especially if the tenant can decide on its consumption. An ancillary supply only exists if the accompanying supplies form an objective whole with the letting from an economic point of view, which is the case, for example, with holiday flats or properties that are only let on a short-term basis for other reasons.

As the electricity was billed individually depending on consumption, the electricity supply was regulated in a separate contract that could be cancelled independently of the rental agreement and the tenant could also choose a different electricity supplier, the tax court had affirmed an independent main supply, which according to the BFH was not objectionable. The right to freely choose an electricity supplier also results from the prohibition of coupling rental and energy supply contracts regulated in the Energy Industry Act. The fact that the tenant had to bear conversion costs in the event of cancellation of the electricity supply contract made the switch more difficult, but not impossible. The principle of neutrality also spoke in favour of this assessment, as the landlord was in competition with other electricity providers who can only offer electricity as a main supply subject to VAT.

As the costs of the photovoltaic system are directly and immediately related to the supply of electricity subject to VAT and the standard market electricity charges at least cover the costs of the photovoltaic system, the landlord is entitled to deduct input tax from the acquisition costs.

The BFH then contrasts this decision with the BFH ruling V R 15/21 from 7 December 2023 (we reported on this here). There, the V. Senate had ruled that there was no right to deduct input VAT from the costs of a heating system because the expenses were not cost elements of an independent heat supply, but of VAT exempt letting. This was justified by the fact that the landlord also owes the supply of heat and water for the contractual use of the flat and that there are no operating costs according to the provisions of tenancy law. § 535 (1) sentence 3 BGB (Civil Code) generally assumes that the landlord includes the costs of the heating system in the rent itself. However, the landlord does not owe the supply of electricity on the basis of the tenancy agreement and, due to the aforementioned prohibition of coupling, the supply of electricity may not be part of the tenancy agreement.

Practical impacts

This judgement and the earlier judgement on the costs of a heating system together bring clarity to the issue of input VAT deduction for utility services to tenants:

With regard to expenses for heating and water, there is no input VAT deduction in the case of VAT exempt letting because the landlord owes these supplies as part of the tenancy.

Expenses for electricity supplies must be assessed in accordance with the legal principles of the ECJ judgement WAM described above, i.e. whether the electricity supplies are independent main supplies (input VAT deduction) or ancillary supplies to the VAT exempt letting (no input VAT deduction) must be determined by examining the two case constellations.

The BMF (Federal Ministry of Finance) will have to revise sec. 4.12.1 para. 5 sentence 3 UStAE (administrative guidelines to the German VAT Code) accordingly. Taxable persons for whom it is favourable to claim input VAT deduction for taxable supplies can already refer to this case law if they disclose it to the tax office. With regard to the purchase of photovoltaic systems, it should be borne in mind that the zero VAT rate is valid as of 1 January 2023 in accordance with § 12 (3) UStG. If landlords purchase electricity and supply it to tenants, they must check whether this makes them resellers within the meaning of Section 3g UStG.

Date: 14.10.2024